Returns On Capital At UPA Corporation Berhad (KLSE:UPA) Paint An Interesting Picture

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think UPA Corporation Berhad (KLSE:UPA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on UPA Corporation Berhad is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.037 = RM10.0m ÷ (RM290m - RM17m) (Based on the trailing twelve months to September 2020).

Therefore, UPA Corporation Berhad has an ROCE of 3.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 3.7%.

See our latest analysis for UPA Corporation Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for UPA Corporation Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of UPA Corporation Berhad, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at UPA Corporation Berhad doesn't inspire confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 3.7%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

In summary, we're somewhat concerned by UPA Corporation Berhad's diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 20% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you'd like to know more about UPA Corporation Berhad, we've spotted 3 warning signs, and 1 of them is concerning.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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